Many investors dismiss emerging markets as a source of dividends, but there are more firms in this region that have delivered dividends in the past nine years than there are in Britain.
The same is true of emerging market entrepreneurs who create and own wealth. These companies, run by first-generation entrepreneurs, have some of the best payout ratios combined with high growth rates. Companies that consistently refuse to pay dividends or do not have a policy are cause for concern.
The most successful emerging market companies and countries want to reform capital markets so that they are less volatile, less dependent on external capital and can generate income and capital. In some cases they have succeeded. The Chilean market is a good example. Reform of the pension system has led to a growth of pension assets to more than half of GDP from negligible levels, and where all listed companies are required to pay out at least 30% of earnings. Wealth is saved and converted to income streams.
”In the past 12 months mid to large cap emerging market companies paid out about $150 billion (£97 billion) in dividends”
The statistics support this case: there are more mid to large cap companies in emerging markets that have paid a dividend in each of the last nine years than there are in Britain, the stronghold of equity income investing. Almost four times as many emerging market companies increased their dividends in dollar terms each year for the past five years than there are in Britain.
Although there are many more eligible companies in emerging markets that are not paying dividends than in Britain, this highlights the potential of the market rather than a structural weakness. There are still more American companies paying dividends, more consistently, so the gap is closing.
In the past 12 months mid to large cap emerging market companies paid out about $150 billion (£97 billion) in dividends – two-thirds of the American total and twice that of Britain. The biggest surprise is how little attention is given to emerging market equity income as an asset class: there is less than $10m devoted to this asset class compared with tens of billions in British equity income funds.
Global equity income funds use emerging markets to boost their portfolios. It is necessary to be selective, and perhaps this is the main problem for generic exchange traded fund access: for every emerging market company promising a high and growing yield there may be another promising not to pay a dividend. For this reason the overall yield is lower (at about 2%) in emerging markets than it is for example in Britain (about 2.7%), however, the yield is growing more quickly. The view that there is no place for dividend investing in emerging markets is old-fashioned. Every week managers push agendas for dividends to emerging market companies and more companies are considering a dividend policy.
Outsiders will probably continue to judge emerging markets by the yardsticks of excess growth and more or less beta, but many of the wealthiest insiders are happy just sitting on their steadily increasing dividend streams. After all, continuous dividends are a pleasure to receive.
Finally, if an investor changes their view of emerging markets and focuses on dividend streams and on the select companies with the best dividend streams, they can be greedy when others are risk-adjusted.